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Incorporating a Business

Incorporating a business or forming a LLC can be an important decision. In the case of a trademark registration, the step of choosing a business structure, usually happens before you list the owner of a mark when filing a trademark application. You should consult with a business attorney or accountant on what type of business entity is best.

This article will cover some of the consideration about incorporating a business. The issues covered will help you ask questions and understand better how to choose a legal structure to grow your website based business from a sole proprietorship to a large and profitable company and build your brand by choosing a strong trademark.

Choice of Business Structure

Your choice of a business structure for your business or the decision for incorporating a business will be based on a weighing of various facts and circumstances. You will not find a specific formula or flow chart type of approach that works for everyone. So consider any of your preconceived notions of the type of business structure appropriate for your business carefully.

major goals of incorporating a business

Paramount Factors: Taxes & Liability Protection

For most business ventures, tax considerations are of paramount importance and are given primary emphasis in choosing a business structure and incorporating a business. The second consideration often given great weight is liability protection. Incorporating a business or forming a LLC provides a corporate veil of liability protection in most jurisdictions.

key considerations for choosing a business structure

CAUTION: THE TYPES OF BUSINESS STRUCTURES AND THE TREATMENT OF DIFFERENT BUSINESS STRUCTURES MAY VARY IN DIFFERENT STATES AND COUNTRIES. THEREFORE, THE DISCUSSION BELOW IS BASED ON LAW IN THE STATE OF GEORGIA AND MAY NOT BE APPLICABLE IN YOUR JURISDICTION.

Treat the information presented herein as informative to help guide you to an intelligent discussion of your options for business structure. Using your preferences, you can then select an entity that is appropriate for you with the help of guidance that is specific for your area.

Sole Proprietorship:

The individual owns the business and there is no separation between the individual’s assets and the business’ assets.

Main advantages:

Simplicity, Flexibility

Main disadvantages:

Personal liability exposure, No continuity of business on death of owner

General Partnership:

An association of two or more individuals carrying on as co-owners of a business for profit.

Main advantages:

Simplicity, Flexibility

Main disadvantages:

Exposure to liability, Equal rights of partners to obligate each other

Limited Partnership:

A limited partnership has at least one general partner (with attendant unlimited liability) and unlimited limited partners. The operation of the business is usually controlled by the general partners.

Main advantages:

Simplicity, Limited liability of limited partners, Allocation of profits

Main disadvantages:

Not a viable choice for a 1 person operation

Limited Liability Limited Partnership:

Some jurisdictions allow a limited partnership to make an election to be treated as a limited liability limited partnership in which the general partner is not subject to vicarious liability for tort and contract claims against the limited partnership.

Main advantages:

Simplicity, Limited liability of general partner

Main disadvantages:

Not a viable choice for a 1 person operation

Limited Liability Company:

The members of a limited liability company are treated like shareholders in a corporation with regard to protection from personal liability, but the members enjoy the tax attributes of a partnership.

Main advantages:

Simplicity, Limited personal liability of members, Good for 1 person operation

Main disadvantages:

Potential management conflicts, Written membership agreement

Corporation:

A legal entity with shareholders, directors and officers. The general characteristics of a corporation include: (1) limited liability for shareholders, directors and officers; (2) centralized management in a board of directors; (3) free transferability of ownership; and (4) continuity of life.

Main advantages:

Limited liability of shareholders, Ability to raise financing

Main disadvantages:

Complexity, Double taxation, Transferability

S Corporation:

A corporation with shareholders, directors and officers that has flow-through taxation to the shareholders without separate double-taxation through taxation of the corporation.

Main advantages:

Limited liability of shareholders, Taxation

Main advantages:

Limit on type of shareholder, Number of shareholders, One class of stock

Where to Start with Incorporating a Business?

Many internet business owners start out as a sole proprietorship. We recommend considering another structure fairly quickly to avoid liability exposure. Also, the longer you wait, the more assets will accumulate and transfer of the assets to a new legal entity will incur more time and costs. The choice of business entity is not always a simple one, and the choice of entity decision is generally uni-directional, as it is rarely possible to go from a corporate setting to an LLC or other partnership tax status without paying a significant tax toll.

Therefore, the following Rules of Thumb provide general guidance on where to start when forming a business entity.

rules for choosing a business structureRULES OF THUMB

Starting up – First Choice is a LLC

1. Most of the time, a LLC should be the first type of entity considered for a new business. In some jurisdictions, a LLP or LLLP or like form may be as good as a LLC.

2. Existing sole proprietorships should consider a LLC immediately to limit personal liability for contracts, torts, and vicarious liability. However, the transfer of assets to the LLC may involve some legal or accounting costs or transfer taxes.

3. Existing partnerships should consider converting to a LLC or LLP election in order to limit personal liability.

Subsidiaries – Single Member LLCs

1. Existing corporations should consider forming subsidiaries as single-member LLCs

2. Provides liability protection

3. Treated like a division for tax purposes

4. Even an S corporation can use a single-member LLC as a subsidiary

5. May have state income tax advantages

Managing employment taxes – S Corporations

1. LLC owners may select designation as an S Corporation to be treated as employees subject to withholding, which can be used to reduce employment taxes on pass-through income.

2. Beware: The IRS may attack owner compensation as unreasonably low, so keep compensation reasonable and ordinary for your type of business.

3. If property assets are expected to appreciate substantially (such as real estate), an LLC might still be the better choice.

Other Considerations

Any of these other considerations may change your selection and should be discussed with a professional:

  1. Start-up losses
  2. Venture funds
  3. Qualified plan investors
  4. Personal service corporations
  5. Exit considerations
  6. Tax-free reorganization
  7. Estate Planning
  8. Real Estate
  9. Simplicity and costs
  10. LLP’s and LLLPs

How to form a LLC

1.  Use an attorney in your state or province.

2.  Use an online service such as Legalzoom.com.

3.  Do it yourself.

To form a Limited Liability Company yourself, you will need to identify corporations division for your state in the U.S. If you are outside of the U.S., you will need to explore your options for registering a company that is the legal equivalent of a LLC and then identify the government agency to register with. I will use the state of Georgia as an example.

Georgia Secretary of State Website

To register a LLC, I go to the Secretary of State website for the state.

secretary of state website Georgia incorporating a business

You can usually find your Secretary of State or Corporations division very easily by using a search engine and using search term like “corporations” and “your state.”

In most states, limited liability companies are formed by filing articles of organization with the Secretary of State. Simple articles of incorporation may be created using a form or a service like Legalzoom. However, many other provisions may, and perhaps should, be included in the articles.

It is very simple to form a LLC. But, as the state of Georgia warns, the question of whether or not an LLC should be formed is complex.

The Corporations Division of Georgia, and I am sure most jurisdictions, strongly recommends that filers obtain professional legal, tax and/or business advice to assure the filer’s goals and intentions are met, and that requirements of the law are satisfied, both before and after formation.

Proceeding On Your Own With Caution

If you are proceeding on your own, you will often be given the option of reserving your name before filing the articles of organization. I recommend paying the required fees to reserve your LLC name online. This will save you time and trouble that can be caused if it turns out that your desired name is not available.

Next, you can file your LLC online if desired. In the case of Georgia, you can actually create your articles of organization during the filing process. Thus, you can form and file for a LLC all in one easy process. It will be very important to have a membership agreement also if you have more than one member.

The membership agreement is the contractual document that will govern how you and your other members operate together and share in the business.

Once you have established a business structure for you web-based business, now it might be time to consider how you are branding your business. A trademark might be an important asset of your business in the future and should be considered as a component of your business brand. A trademark application can be used to enhance the protection of your trademark and help ensure its long-term availability for the growth of your business.

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